No good deed ever goes unpunished. Asians
are quickly discovering the wisdom of this idiom,
as they suddenly confront staggering shortages in
basic food items. The price of rice has gone up
exponentially in the past few weeks, crossing
US$1,000 a tonne, despite the absence of any
discernible decrease in global production nor a
concurrent increase in consumption.
The
upshot for Asian governments is increased social
tensions in many countries where food shortages
were unheard of until very recently, as well as a
number of others where economic fragility has
increased on the back of rising food prices.
People have to eat, and if it costs them too much
to eat, they will in turn demand to be paid more.
This creates a vicious cycle of inflation that
will eventually reduce the living standards of
pretty much every
second person in the region.
The source of this sudden spike in food
prices, led by rice, has been the weakening
purchasing power of the world's favorite flawed
fiat (FFF as Asia Times Online feature columnist
The Mogambo Guru might call it) currency. The
second reason is what military strategists would
euphemistically term collateral damage from the
ongoing reshaping of the world economic order,
namely increased difficulties being faced in
international trade.
Pffftt ... goes free
trade Tackling the second problem
first, the world appears inexorably headed for a
period of increased trade confrontations that
would make trade terms much more onerous for most
countries. The primary target is Asian exports,
which are much more competitive now than say 10 or
20 years ago.
Grumbling about the losses
of jobs in America and Europe, and using the
environment as an excuse, the West is already
imposing substantial penalties on the natural
advantages of Asian manufacturing. This will lead
to higher tariffs on most products, as well as the
tying of investments with trade, a key demand from
Western countries seeking to overturn the savings
advantage of Asians by erecting monopolistic
structures around their entrepreneurs.
Agricultural produce has been the source
of much abuse by the Europeans, whose Common
Agricultural Policy (CAP - surely an acronym that
deserves an "R" as its second letter) is uniquely
responsible for keeping a billion people in dire
poverty. The American response has been both
through their own subsidies, and by increasing the
alternative uses of agricultural crops such as
ethanol for corn that is heavily subsidized in the
name of energy self sufficiency.
CAP
ensures that vast farms producing overly expensive
produce in Europe are sustained at taxpayer
expense, leaving fallow the fertile lands of
Africa and many parts of Asia as excess production
is dumped on global markets. These countries
cannot export to Europe or the United States due
to the tying of agricultural trade with unrelated
items, creating astounding tariff and non-tariff
barriers to trade.
A simple example is
sugar. Over a fifth of the world's sugar is
derived from beet, even though it is more than
five times inefficient compared with sugarcane
product due to its higher consumption of energy
and other factor inputs. The reason that beet
sugar is produced at all is the CAP subsidies in
Europe, which in turn make it uneconomical for
many farming countries in central Africa to grow
sugarcane. The result is a constant search for
employment, income in turn creating a mess of
tribal conflicts across the region.
Any
European who talks about how much more civilized
the continent has been relative to America's
war-mongering clearly doesn't understand the
horrific costs on poor farmers elsewhere in the
world. Put simply, while it's easy to count
America's war dead perhaps in the hundreds of
thousands, victims of European farm subsidies
number in the hundreds of millions.
The
eagerness of unctuous European politicians to
protect schemes like CAP has proved to be the
biggest stumbling block in talks in free up global
trade and has led to a complex web of tariffs on
agricultural produce. Each layer of tariffs
imposed by a country creates an additional issue
for every bilateral agreement. If you wanted to
picture this, the best would be a large spider's
web, but with every node hosting a separate web
connecting with a specific group of countries.
The upshot of all this is that trading in
agricultural products is by far the most complex
issue in international trade with lack of uniform
standards, multiple layers of bureaucracy, zero
price transparency and most importantly, a
complete absence of free markets.
All too
often, these arrangements fail - imagine the
spider's web above and think that a ball bearing
were to fall through multiple layers - and you get
the idea that what starts as a minor problem, such
as a weather disturbance, in one country can
quickly degenerate into global panic on the price
of the produce affected.
This is what has
happened to rice of late. The largest consumers of
rice being in Asia, a few minor weather
disturbances caused exports to decline and as
prices rose as a consequence, quickly caused a
domino effect of trade bans and other barriers,
accentuating the problem. The Philippines is the
worst affected by the mess, but others like
Indonesia are also suffering.
Rice may be
an Asian problem, but the unnecessarily complex
system of trade agreements in place is clearly a
legacy of corrupt European governments, who bear
all the moral shame in this matter.
Flawed
fiat currency There is however another
culprit here, one that gets away scot-free
usually. As most regular readers of this column
know, I am referring to the root cause of the
current mess of inflation amid excessively
depressed interest rates, the US dollar. More
simply, the idiot central bankers of Asia who
squander their responsibility at the altar of
conformity by purchasing billions of dollars worth
of useless financial assets have done their region
a great disservice. This is really simple to
understand for even a child of five, but since
central bankers often forget basic things like
tying their shoelaces, lets remind them.
Purchasing too much of anything increases
its price, not its value if the latter is defined
purely as the marginal utility of consumption. The
US dollar is too strong relative to inherent
industrial and service sector advantages of the US
economy today. Put differently, America's economy
if far bigger than it deserves to be, thanks
mainly to the unregulated appetite of Asian
central bankers in accumulating US dollars and its
overvalued counterparts such as the euro.
This is why Americans continue to drive
gas-guzzling SUVs to collect their unemployment
benefits from an increasingly indebted US
government that in turn borrows the money from
Asian governments by giving them IOUs that return
less than the domestic inflation rates of all
these countries. (Note: if you are a central
banker, you are encouraged to read that sentence a
few times. Anyone else will have understood it in
the first read and can proceed).
The other
side of this wealth transfer is that Asian
currencies are stupidly cheap compared with the
competitive advantages that have been heaped on
the region for the past few decades. That in turn
attunes an excessive number of factor inputs to
the production of goods for the US consumer rather
than serving domestic consumption. Looking through
the economic make-up of most of the region, only
Australia and India stand out as countries with a
defensible mix of domestic consumption against
goods produced for exports.
Locking up
savings in a currency that has terminally
declining purchasing power means that Asian
authorities have less fiscal and monetary policy
leeway to regulate the dynamics of their own
economies. This is what causes structural
inflation, that is, the achievement of a new level
in prices, as different from a cyclical increase
in prices, which has in turn manifested in food
prices.
As governments in countries like
the Philippines scurry for cover, very little is
being said about the main culprits, namely
European farm subsidies and the overvalued US
dollar.
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